Sun Pharma - Par excellence - Centrum

Sun Pharma Industries' (SPIL) results for Q3FY13 were better than our expectations. The company reported a growth of 33%YoY in revenues, 50bps decline in EBIDTA margin and 32%YoY growth in net profit. SPIL's margin decline was due to the increase in material cost. The company has acquired Dusa-a dermatology company in the US for $230mn (Rs12.42bn). It also acquired URL's generic business from Takeda during the quarter. We have revised the FY13 and FY14 EPS estimates upwards by 20% and 9% respectively. We have a Buy rating for the scrip with revised target price of Rs905 (based on 25x FY14E EPS of Rs36.2).

Excellent sales growth: SPIL reported 33%YoY growth in revenues from Rs21.49bn to Rs28.66bn due to excellent growth in formulations both in the US and RoW. The sales growth in various geographies was as follows: India formulations 13%YoY, US formulations 44% (32% in $ terms), RoW formulations 40% (31% in $ terms), API 36%. US formulation growth was driven by supply of Lipodox to the US and price increase for Taro products. SPIL received approval for generic Doxil in Feb'13 and this product is likely to drive future growth.

Margin declines: SPIL's EBIDTA margin declined by 50bps YoY from 45.0% to 44.5% due to the increase in the material cost. Material cost grew by 190bps from 17.6% to 19.5% of revenues due to the change in product mix. Personnel cost increased marginally by 10bps YoY from 13.4% to 13.5%. Other expenses declined by 150bps from 24.0% to 22.5% due to the strong revenue growth.

Rich product pipeline for US market: SPIL has a rich product pipeline for the US market. The company has filed 232 DMFs of which 161 have been approved. SPIL along with Taro filed 403 ANDAs of which 261 were approved and142 are pending approval. We expect this strong pipeline to drive future growth.

Leading brands growing well: SPIL's eight major brands are growing faster than the market. As per IMS MAT-December'12 data, the company reported higher growth of 16.6% against the industry growth of 11.1%. The growth rates of its major brands were as follows: Pantocid 16.7%, Aztor 18.1%, Gemer 28.0%, Pantocid-D 25.7%, Glucored 8.5%, Susten 11.7%, Levipil 53.9%, Clopilet 14.0% and Rozavel 40.2%.

Termination of Taro agreement: SPIL and Taro have mutually agreed to terminate their merger agreement of August'12 to acquire minority stake in Taro at $39.5 per share in the interest of both the companies.

Valuations: We expect SPIL to benefit from favorable currency movement and strong growth in the US and RoW markets. The company is likely to achieve good MS for generic Doxil as there is no competition. At the CMP of Rs746, the stock trades at 22.1x FY13E EPS of Rs33.7 and 20.6x FY14E EPS of Rs36.2. We have revised our EPS estimates for FY13 and FY14 upwards by 20%and 9% respectively. We have a Buy rating with a revised target price of Rs905 (based on 25x FY14E EPS of Rs36.2) with 21.4% upside.

Source : Equity Bulls

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